Sysco Corp. (SYY): A Future Dividend King Worth Reviewing

Dividend investing has proven to the be an effective way for investors to compound their wealth and income over time.

And when it comes to dividend growth stocks, they don’t get much more consistent than the dividend aristocrats and dividend kings, groups of companies that have raised their dividends for at least 25 and 50 consecutive years, respectively.

Let’s take a closer look at Sysco Corporation (SYY), which is a dividend aristocrat and, thanks to 48 consecutive years of dividend growth, is just two years away from becoming a dividend king.

More importantly, learn if Sysco seems likely to reward dividend investors with many more years of income growth and if today’s valuation appears to be reasonable.

Business Overview

Founded in 1969 in Houston, Texas, Sysco is one of the world’s largest food distributors, essentially acting as a middleman between food producers and retail consumers.

Sysco’s 65,000 employees serve half a million customers in 13 countries, although the U.S. is its most important region by far.

(Click on image to enlarge)

SYY geographic distribution

Source: Sysco Corp

Sysco’s client base includes everything from restaurants, hotels, and hospitals to government agencies and schools. The products it sells are diversified as well.

(Click on image to enlarge)

SYY 2016 revenue breakdown

Source: Sysco Corp

Business Analysis

A company’s ability to steadily grow its dividend for decades usually depends on two key factors.

First, the business model needs to be stable, providing consistent and recurring cash flows from which to reward income investors. The second is a competitive advantage or moat of some kind in order to preserve, and hopefully grow, its margins and returns on shareholder capital over time.

Sysco Corp enjoys both of these attributes. That’s because even during economic downturns people still need to eat (sales declined just 2% in 2009), and the company’s highly diversified customer base somewhat insulates it from industry downturns, such as those that occur with restaurants during a recession. As a result, Sysco generates highly consistent cash flow.

Wholesale food distribution is a simple business as well, which is likely one reason why Warren Buffett bought into the industry in 2003 when he acquired McLane Company from Wal-Mart for $1.45 billion.

The industry’s pace of change is very slow, and new innovations seem unlikely to pose any material threat to the way the wholefood distribution space operates. At the end of the day, food manufacturers need a cost-efficient way to get their products to retailers and consumers.

The best operators offer prompt and accurate delivery of orders, a broad assortment of products, and competitive pricing. Since distributors are middlemen, their margins are very low (Sysco’s operating margin has averaged less than 5% over the last decade) and players must either establish themselves as price or niche leaders in a given region.

Not surprisingly, Sysco’s scale plays a big advantage and forms a moat. Since its formation nearly 50 years ago, Sysco has grown from $115 million to more than $50 billion in annual sales, driven by a long history of well-executed acquisitions in this highly capital intensive industry.

SYY acquisition history

Sysco benefits from having the industry’s best economies of scale, and few companies have the capital and supply chain network and expertise to match Sysco’s inventory assortment.

When combined with Sysco’s wide network of warehouses and distribution systems, the company enjoys an advantage in serving national accounts and can offer daily delivery to most of its customers. Thanks to its dense delivery network around its warehouses, Sysco can offer lower pricing than most other distributors in its geographic regions, too.

The company’s latest acquisition, Sysco’s $3.1 billion purchase of European food distributor Brakes Group in 2016, gives the business a solid foothold into international expansion, which is necessary because the opportunity for needle-moving growth in the mature U.S. market is narrowing.

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Disclosure: None. 

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